Who’s The Gorilla And 8 More Questions About the iPhone 5C

Sure looks that way. The rumors have grown so loud that they’ve become deafening. Let me put it this way: If the iPhone 5C is NOT announced on September 10th at the upcoming Apple event, it will be the non-announcment heard ’round the tech world.

There’s nothing in this world more instinctively abhorrent to me than finding myself in agreement with my fellow-humans. ~ Malcolm Muggeridge

Question #2: Why The Change In Apple’s Strategy And Why Now?

It’s hard to say who gets criticized the most, the successful person, or the failure but it’s mighty close. ~ Joe Moore

Apple definitely considered doing a mid-range phone years and years ago. They opted, instead, to continue manufacturing their one-year and two-year old phones and sell them at lower price points. That strategy has been successful, but it also may have run its course. For a good read on this topic, I commend you to Rene Ritchie’s article entitled: “Why iPhone 4C didn’t make sense but iPhone 5C just might.”

The hardest thing to learn in life is which bridge to cross and which to burn. ~ David Russell

Question #3: How Will Apple’s Corporate Philosophy Shape Their Decisions On The iPhone 5C?

Do what you feel in your heart to be right – for you’ll be criticized anyway. ~ Eleanor Roosevelt

When thinking about the iPhone 5C, we need to keep in mind that Apple is unique. First, Apple has always been about making the best, not the most.1 Second, Apple is not afraid of cannibalizing their own products. Third, Apple believes in simplicity — less, but better. Fourth, Apple’s strength is in its ecosystem. Any tactical decision that diminishes the cohesion of Apple’s ecosystem would be strategically counter-productive.

The man who follows a crowd will never be followed by a crowd. ~ R. S. Donnell

Question #4: Is Apple Introducing the iPhone 5C In Order To Standardize Their Technology?

Absolutely.

Logic merely enables one to be wrong with authority. ~ Doctor Who

This is definitely one of the most compelling reasons for the move to the iPhone 5C. It will allow Apple to simultaneously retire the iPhone 4 and 4S and move its new customer base to the newer iPhone screen size and to the newer iPhone Lightning power cords. This is not the only reason for the move to the iPhone 5C, and it may not be the primary reason for the move, but it is entirely consistent with Apple’s doctrine of simplifying their product lines and consolidating their ecosystem.

Question #5: Is Apple Doomed If It Doesn’t Add More Market Share?

Get a grip.

Apple’s market share is bigger than BMW’s or Mercedes’ or Porsche’s in the automotive market. What’s wrong with being BMW or Mercedes? [2004] ~ Steve Jobs

If Apple is doomed, then what does that say about the respective state of their rivals?

Profit is one of the nine reasons to be in business. The other eight are unimportant. ~ John Kirk

Apple is doing just fine. Turns out that selling a differentiated premium product is a sustainable business model. Who knew?2 (Most every knowledgeable business observer, that’s who.)

We learn from history that we do not learn from history. ~ Georg Wilhelm Friedrich Hegel

Those who do not know their history insist that history is about to repeat itself – that Android is about to become the next all-encompassing Windows monopoly. But if you know your business history, then you know that Windows was an aberration, not a precedent; the exception to the rule, not the rule.

We’re seeing history repeat itself all right. Just not the history most have mis-remembered.

“History is a very good teacher, but (it) has very few students.” ~ Wael El-Manzalawy

“What ruined Apple was not growth … They got very greedy … Instead of following the original trajectory of the original vision, which was to make the thing an appliance and get this out there to as many people as possible … they went for profits. They made outlandish profits for about four years. What this cost them was their future. What they should have been doing is making rational profits and going for market share.” – Steve Jobs, 1995

Whenever Apple’s market share comes up, so does the above Steve Jobs quote. But when you’re re-reading that quote, keep these things in mind.

First, Steve Jobs was still running Apple when the current iPhone pricing policies were set. It’s unlikely that he forgot his own advice.

Third, pricing to gain market share simply for the sake of market share is a chump’s game.

Apple already has 65 percent of the mobile phone profits with only 6 percent of the market share. How much more profit share can Apple reasonably hope to acquire?

Fourth, Steve Jobs wasn’t talking about ALL market share, he was talking about acquiring the RIGHT market share. Some customer’s are simply not worth having.

The question is one of price elasticity: How much more profit, if any, will Apple garner by lowering the price of their phone?3 And will the market share that they acquire be desirable?

Question #7: Is Pricing The Key To The iPhone 5C?

No.

(The price of the iPhone 5C) is the only thing that deserves analysis ~ Horace Dediu

I respectfully disagree.

The success of the iPhone 5C depends upon valued differentiation. The key is not to make the phone cheaper, it is to make it more valuable EVEN THOUGH IT IS CHEAPER. (Perhaps Apple should call it the iPhone 5 “V” instead of the iPhone 5 “C”.)

Many companies foolishly try to differentiate their products by price. This is always a mistake. If the lower priced item is more valuable than its price, then it cannibalizes its premium sibling. If the lower price is achieved by crippling the value of the product, then poor sales and user dissatisfaction ensue. (See, for example, Windows RT).

The key is to differentiate without disabling the product. You want to create a product that is, yes, lower priced, but the lower price is merely the icing on the cake. The “cake” is that the lower priced product is actually MORE VALUABLE to its intended audience than its premium priced cousin.

Take for example the iPod Nano and the iPad Mini. In both cases, they were lower priced than their premium siblings. But in both cases, the features that the products were missing (size, for example) actually ENHANCED their value to their target audience. Apple needs to do the same with the iPhone 5C.

A satisfied customer is the best business strategy of all. ~ Michael LeBoeuf

Question #8: How Will Apple Differentiate The iPhone 5C From the iPhone 5S?

I don’t know.

I used to be indecisive but now I am not quite sure. ~ Tommy Cooper

— They could do it by making the phone only work in certain geographic locations, like China.

China is a big country, inhabited by many Chinese. ~ Charles de Gaulle, former president of France

I don’t think that’s likely.

— They could do it via specs: lower memory, storage, processor, no LTE antennas, no NFC, no Siri…

…no way. This is crippling the product, not enhancing it. The new iPhone 5C will certainly have lower specs, but those lower specs – as with the iPod Nano and the iPad Mini – should be consistent with the job the product is being asked to do. Artificial differentiation should be avoided at all costs (see what I did there?).

People want economy and they will pay any price to get it. ~ Lee Iacocca

Apple’s goal is to CONSOLIDATE their ecosystem, not fragment it.4 Nothing should be “missing” from the iPhone 5C that will be “missed” by any of its intended audience.

Power is not revealed by striking hard or often, but by striking true. ~ Honoré de Balzac

Question #9: Who’s The Gorilla?

Competing in the market is like wrestling a gorilla. You don’t quit when you’re tired, you quit when the gorilla is tired. The question is, who’s the gorilla in the smart phone space – Apple or Apple’s competitors?

Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window. ~ Peter Drucker

We may find out who the Gorilla is on September 10th.

Tim Cook: “For us, winning has never been about making the most. Arguably we make the best PC, we don’t make the most. We make the best music player, we wound up making the most. We make the best tablet, we make the most. We make the best phone, we don’t make the most phones.” [↩]

Ben Thompson: It turns out there are two sustainable positions in an industry (and to be clear, this isn’t exactly rocket science. Again, business school…). The low cost leader – Samsung – and the highly differentiated one. See, Apple already did “transform the industry with a revolutionary design.” And while Android has made significant gains on the hardware, software, and even ecosystem fronts, the overall package offered by Apple is still highly differentiated. The evidence bears this out: Apple charges the highest prices for phones, happily subsidized by carriers (especially in the US), because customers will change carriers to get the iPhone. This results in by far the highest margins in the industry with only a small portion of the overall volume. [↩]

“Price elasticity” seems to be way beyond the pay grade of most pundits and analysts who follow the mobile sector, but what it essentially means is that when the price of something goes down, sales almost always go up, but the rate of that sales increase depends upon the price elasticity of the product. In other words, dropping prices may increase sales but the increased sales may result in disproportionately larger or smaller profits. Unless we truly understand the price elasticity of the iPhone, we really shouldn’t be calling for Apple to drop its iPhone prices. [↩]

Tim Cook: “And I would just add to that, because we are not fragmented like our competition, we can update an iOS with a major release and a substantial percentage of our customers will update to the – to our latest offer. We’ve made that very elegant and very easy. Also because the usage for iOS is so much higher, when we integrate things well, people use them a lot more and so just those concepts by itself are huge advantages from a customer experience point of view and from a more of the metrics that you’re thinking about point of view.” [↩]

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John Kirk

John R. Kirk is a recovering attorney. He has also worked as a financial advisor and a business coach. His love affair with computing started with his purchase of the original Mac in 1985. His primary interest is the field of personal computing (which includes phones, tablets, notebooks and desktops) and his primary focus is on long-term business strategies: What makes a company unique; How do those unique qualities aid or inhibit the success of the company; and why don’t (or can’t) other companies adopt the successful attributes of their competitors?

I have a feeling I’m overdoing the quotes. Here’s an opportunity for other readers to chime in and provide me with their opinion on whether I’m overdoing it or not.

sgns

You asking and answering your several excellent questions head-on also made the difference. I hereby trust your judgement on the quotes. They certainly worked for me.

TheEternalEmperor

Like the quotes. Very entertaining. And quotable.

Nangka

I like the quotes John. They make you think a little more about the points you raised. So often we just go with the first thought (sometimes with expletives) when we read something controversial.

def4

One overlooked part of that Steve Jobs quote is that the Mac “products became mediocre”. So the problem wasn’t with higher Mac prices, but with the combination of mediocrity and high prices.

In addition, many seem to think Apple must choose between having iOS be either as dominant as Windows or as insignificant as Mac OS used to be. There’s a lot of room between 3% and 97%.

AhmadZainiChia

“Valued differentiation.”

That, to me, is the biggest insight here, and one many people don’t mention and don’t understand. Thanks for that John. Brilliant insight.

One plausible differentiation might be “less powerful(and perhaps slightly less cutting edge camera), but thinner and lighter”. John Gruber mentions this in his post on the low cost iPhone too; but I’m not sure if such a product could hit a low enough price point though.

FalKirk

“Valued differentiation.” – AhmadZainiChia

Thank you. I feel strongly that far too many companies try to use price, rather than value, to segment their product lines.

DarwinPhish

“I don’t mind speculation (in fact, I revel in it) but I don’t like building analysis on top of speculation. I simply can’t draw any conclusions from this until 1) I know it’s real; 2) I know what it looks like and how it’s configured; and 3) I know how and where Apple is going to sell it.” — John Kirk

I guess someone can forget their own advice!

FalKirk

“Consistency is the quality of a stagnant mind.” ~ John Sloan

Seriously, though, I think I took my own advice. I stayed away from building analysis on the unknown and unseen iPhone 5C. Instead, I talked about whether it would exist, why Apple might have changed their strategy, how Apple’s corporate culture would shape such a decision, Apple’s bent toward standardization, the importance of market share, the LACK of importance of market share and why valued differentiation was more important than price. All of those are things we known now. I refused to speculate on HOW Apple would differentiate the iPhone 5S and who the gorilla in the was.

But I take your point. Speculation is fun. I’m looking forward to expanding my analysis as soon as some more facts are disclosed at the September 10th event.

Glaurung-Quena

Differentiate without disabling… Let’s say that the Nexus 4 represents the cheapest you can make a smartphone today that does all the things people expect a first world smartphone to do and do them well enough that your customers will be happy. Google sells that at cost for $300. Yes there are cheaper android phones, but they’re all crippled in one way or another – poor performance, no camera, low-res screen, etc.

Apple’s customary margin, aside from the Iphone, is around 30-40%. Right now they have a device that sells for $300, same as the nexus — but the Ipod touch is a WiFi only device. Recently Apple eliminated the old-generation Touch and issued a $70 cheaper version of the latest-model Touch… but the cheaper Touch is crippled as it has no rear facing camera. So that $300 price tag is as low as they’re willing to go.

I don’t know how much it would cost to add a mobile data chip and antennas/phone headset hardware to the Touch… but the chip probably costs at least $10, plus another 10-20 for the rest and apple’s margins on top, it seems likely that Apple isn’t going to be able to sell such a device for less than $350-400 unless they remove some functionality from it (a cameraless iphone, or a substantially slower iphone).

Which pushes the price of the new low-cost iphone to the very nosebleeding top of the prepaid market. Pundits all over have been writing that Apple needs to get into the prepaid market with a $300 or cheaper phone… but maybe Apple doesn’t regard things with the same urgency.

Maybe Apple regards the prepaid market as something they can wait one more year to enter in force. So the new low-cost iphone starts out at nearly the same price range as today’s Iphone 4… and then next year, they keep the year-old model around at a discounted price. Next year they have four Iphone models for sale, at prices ranging from $325 (high end prepaid, or get one month of free service if you buy it with a contract) to $625 (aka $200 with a contract).

FalKirk

“Pundits all over have been writing that Apple needs to get into the prepaid market with a $300 or cheaper phone…” – Glaurung-Quena

Pundits said that Apple needed to sell the iPad Mini for $200-250. Instead they’re selling it for $329 and up and it’s selling quite well.

I think the phone will be around $450 (not that I know). Remember, Apple is already capturing 65% of the profits and the cream of content buyers. They want to continue to skim the profits and the best customers in order to maintain their position as the premium smart phone ecosystem.

The don’t want ALL the smart phone customers, just the best.

Glaurung-Quena

“Pundits said that Apple needed to sell the iPad Mini for $200-250. Instead they’re selling it for $329 and up and it’s selling quite well.”

I think we’re agreeing that the predictions that the 5c is going to be significantly cheaper than the current Iphone 4 are off the mark.

The question is, does Apple want to be selling significant numbers of phones to the many places in the world where you normally buy your phone outright (no contract, no subsidy)? Do they want to be selling to the many billions of customers who cannot afford a $400 phone? And if they do want to do either of these things, when are they going to start doing so? Remember that services and media sales are just icing on the cake — Apple is first and foremost a hardware company, and if they can make money selling Apple devices to people who can’t afford to buy very much from Itunes or the app store, they will happily do so. The only stumbling block is they don’t want to make devices that are of low quality because that would tarnish their brand.

DarwinPhish

“I don’t know how much it would cost to add a mobile data chip and antennas/phone headset hardware to the Touch.. but the chip probably costs at least $10”

It’s more than just the cost of the chip. Adding radios and antennas requires a lot of additional engineering, space and battery power. The battery in the iPhone 5 is about 40% bigger than the one in the 5th generation Touch even though they both offer comparable video and music playback times And its more than just the chip and antenna — adding phone service requires more processing power and regulatory approval.

The incremental cost of adding cellular to an iPad is $130 (this also includes GPS but does not included calling and SMS capabilities). If Apple’s markup is 100% (which is just a guess), that is $65 in additional costs.

Glaurung-Quena

The chip was the only part that I had even the vaguest idea of its cost, but I’m aware that there’s a lot more to it than that. I suspect that the price for LTE added to an ipad represents a lot more profit than Apple’s usual margins… But on the other hand the cost for adding it to the Touch would be even higher than the cost for adding it to a tablet because you’d have to add the phone headset hardware (extra speakers and microhones) as well as the antenna and silicon.

DarwinPhish

iSuppli put the cost of the LTE chip in the iPad mini at $34. They assign no additional costs for the LTE upgrade.

DarwinPhish

Well, if we are going to speculate…

I think there is a very good chance Apple is going to put Qualcomm’s new RF360 chip in its new phones. This chip supports just about all cellular networks and bands in the world, including China Mobile’s 3G & 4G networks. This means Apple will not need to make multiple versions of for different markets and carriers, which should simplify production, inventory management and distribution. In fact, I think the availability of this chip is the # reason why Apple will debut 2 iPhone models this year.

Because of this new chip, I think Apple is going to discontinue not only the 4, but also the 5. Doing so would allow Apple more flexibility in pricing the 5C and differentiating it from the 5S, without also needing to differentiate it from the 5. The 5C will be offered in multiple colours and memory configurations. I do not think it will be priced as low as some hope/expect, though I could see it going as low as $0 on contract or $450 outright. More than an inexpensive iPhone, Apple needs a phone that works on China Mobile’s networks

FalKirk

“Well, if we are going to speculate…” – DarwinPhish

We sure as shooting are… 🙂

Claude Hénault

Were I Apple I would offer two, and perhaps three, models of the iPhone 5c differentiated by connective ability.

1. A VoIP-only phone with all the bells and whistles but working only on Wi-Fi. This could replace/supplement the iPod Touch. 2. A VoIP-only phone like the above, but with step-up to LTE, as is on offer with the iPads. 3. And, in a gesture of lesser disruption, a version enabling traditional voice service. The one everyone is expecting.

Data-only phones would not only be a little less expensive to produce and sell, they would undermine the other major mobile phone cost element, the cellular connection charges. True augmented affordability.

The step is no tech biggie. FaceTime for iOS 7 will offer voice-only calls. It is a small step from there to Apple offering capabilities like visual voicemail, but for VoIP. And a number of third-party services already offer to provide free mobile phone numbers suitable for data-phone calls to both mobiles and land lines. Apple too could do this, nation-by-nation.

Phones like these would help explain Apple’s recent focus on selling more phones in Apple stores and online. Some carriers will initially be reluctant. With some others Apple will have carved out deals in advance. For the USA, my bet would be AT&T once again.

There I go, dreaming in technicolor again.

FalKirk

” I would offer two, and perhaps three, models of the iPhone 5c differentiated by connective ability.” – Claude Hénault

I think this makes sense in terms of differentiation, but I think it is counter to their overall strategy of keeping their ecosystem coherent and integrated.

Claude Hénault

I respectfully disagree. I don’t see how an all-digital phone would be less coherent and integrated with the Apple ecosystem than the current artificially schizoid data-voice-paid SMS version. For the user, connective mode aside, the two types of phone would be functionally similar, as are the iPod Touch and iPhones today. It is probable that quite soon all smartphones will move to all-digital operating mode.

The link below is to a USA Today article in which AT&T CEO Randall Stephenson last year states that data-only phone contracts are inevitably coming soon.

There are two aspects to making phones less expensive, reducing hardware cost and lowering connection charges, with the latter overcoming a more significant barrier to entry. Pure data could be lots cheaper than voice-minutes and SMS charges, especially with good onboard usage monitoring.

So it would make sense for Apple to let a challenger entrant like the 5C phone carry the fight to a new connectivity-mode while the flagship 5S carries the traditional offering. Eventually the flagship too would adapt.

But even today the phones need not be functionally different.

Claude Hénault

Were I Apple I would offer two, and perhaps three, models of the iPhone 5c differentiated by connective ability.

1. A VoIP-only phone with all the bells and whistles but working only on Wi-Fi. This could replace/supplement the iPod Touch. 2. A VoIP-only phone like the above, but with step-up to LTE, as is on offer with the iPads. 3. And, in a gesture of lesser disruption, a version enabling traditional voice service. The one everyone is expecting.

Data-only phones would not only be a little less expensive to produce and sell, they would undermine the other major mobile phone cost element, the cellular connection charges. True augmented affordability.

The step is no tech biggie. FaceTime for iOS 7 will offer voice-only calls. It is a small step from there to Apple offering capabilities like visual voicemail, but for VoIP. And a number of third-party services already offer to provide free mobile phone numbers suitable for data-phone calls to both mobiles and land lines. Apple too could do this, nation-by-nation.

Phones like these would help explain Apple’s recent focus on selling more phones in Apple stores and online. Some carriers will initially be reluctant. With some others Apple will have carved out deals in advance. For the USA, my bet would be AT&T once again.

There I go, dreaming in technicolor again.

villageindian

John, your link for the line “Apple easily out-profits both Microsoft and Google” points to a local webarchive link in Scrivener and needs to be fixed.

You’re on the right track about price elasticity but you could have put it more precisely. You can have price elasticity greater than 1, i.e. the proportional increase in Sales Revenue > the proportional decrease in Price, but still suffer a decrease in profit if the increase in total costs (since you’re producing & selling more units) swamp the increase in sales revenue. In this case even if your price elasticity looks good, you still wouldn’t want to drop your prices. You implicitly assumed that costs would not do this.

FalKirk

“…the only thing I can think of is the usual slower CPU, lower camera rez, and less storage capacity…” – aardman

I would consider that a huge failure on Apple’s part.

John Gruber has said that 5C will be of high quality – same chip. There is little doubt that it will have lower specs, but the specs should not artificially cripple it.

Like you, I am having trouble imagining how Apple will differentiate. That is why I have been suspicious of the existence of a mid-priced phone. The older phone differentiated merely by being last year’s model.

But just because I can’t imagine differentiation, doesn’t mean that Apple can’t. I’m thinking that the high end phone might have an expensive fingerprint sensor but that, too, would divide the ecosystem, so I’m not sure.

keizer_soze

sometimes, what excites a certain segment of the potential market that would be interested in a phone like iphone 5C is not that fancy: different colors! oooh, wow! from what i’ve read (and also thought from when these rumors first came out earlier in the year) is that the iphone 5C is just the iPhone 5 in a plastic shell, in different colors.

FalKirk

“sometimes, what excites a certain segment of the potential market that would be interested in a phone like iphone 5C is not that fancy” – keizer soze

I hear what you’re saying, but I think the differentiation must be real and must be substantial.

Space Gorilla

The images that have leaked, if they can be taken as real, make the difference obvious, the industrial design is quite different, and I think that matters, I think it’s enough.

FalKirk

“You’re on the right track about price elasticity but you could have put it more precisely.” – aardman

I don’t think that there is enough data to do an accurate analysis of price elasticity. Am I wrong? Do you think a meaningful analysis can be accomplished with the information that is available?

Grant Winkler

The article was to the point with its brevity making it even better. The quotes helped in understanding by underlining the points being made. Almost a kind of punctuation in fact. Always a joy to read good writing. (My work in government involves a lot of reading and writing. I make no claims about my own writing but I am confident in my ability to know the difference between good and bad writing!)

FalKirk

“Always a joy to read good writing.” – Grant Winkler

Thank you so very much! Your comments are greatly appreciated.

However, I must humbly disagree with your assessment that the word “brevity” should ever be used to describe my work. Sadly, I never met a sentence that I couldn’t turn into a paragraph 🙂

Nevertheless, I sincerely appreciate your taking to time and effort to comment on my work. I’ll try to do even better next time!

jfutral

“Profit is one of the nine reasons to be in business. The other eight are unimportant. ~ John Kirk”

Got to love it when you can quote yourself!

Nicely done, Joe

FalKirk

It was a take off on a George Burns joke. You’re the first one to take note of it. 🙂

This was the best tech article I’ve read all month. And I read a good tech article almost daily. Have to check out more of your work.

Only thing I would quibble with is the part about Apple making 65% of mobile industry profits and not having much more profit share to take. The stat is accurate, for sure.

But what if Apple can lure 15-20% more current Android users into the Apple ecosystem? And what if by doing so those users spend far more money (e.g., on apps, games, music, etc) than they would have if they had stayed on Android?

So it’s not necessarily a matter of stealing a lower value customer, but also turning a lower value customer into a higher value one. I don’t have stats to back that up. It’s just a thought. But if it’s possible, it means Apple has the ability to expand that profit pie much further than we think.